Auto Financing With High FICO Scores

by Amber Keefer

How much an auto loan costs you depends on your FICO score.

When looking to buy either a used or new vehicle, chances are you’re going to need some financing help. While lenders will offer you better loan rates if you have a high FICO score, a lower credit score could mean paying up to double the interest rate, according to Fair Isaac. Minor credit problems can lower your score so that you need more cash for a down payment on an auto loan.

Credit Tier

The auto loan rate you pay depends on where you fall in the credit tier -- a system that ranks how much of a credit risk you are. Under the FICO scoring system, falling into the 720 to 850 credit tier gets you the lowest annual percentage rate so that you pay the least amount of interest over the term of the loan. The lower your score, the lower you drop on the credit tier, increasing both the APR and interest rate. While some lenders use credit-scoring systems that only take into account your auto loan payment history, making late auto payments can bump you down a tier. This will lower your credit score and increase the cost of financing that new car you want.

Median Credit Score

A high FICO score qualifies you for a lower interest rate on an auto loan. Usually, you need a credit score of 740 to get the best loan rates. Anything below that means paying a higher rate of interest. You may also have to make a higher down payment. The worst case scenario -- if your credit score is too low, you won't get the loan. There's still a chance that you can land yourself a cheaper auto financing deal with a score of 720 -- the median credit score on the FICO scale.

Upping Your Score

One way to up your credit score is to keep your credit utilization -- the measure of how much of your available credit you use -- below 10 percent. Using less credit can help boost your FICO score. Credit scorers particularly like to see small credit card balances. Dividing large balances out on several credit cards can increase your score as well, although paying down revolving debt improves your credit score the most. Also, when you’re trying to boost your score, don’t argue with a utility company or other creditor over a bill, as having your account turned over to a collection agency can really drop your score. It’s better just to bite the bullet and pay the bill until you settle the dispute.

Affordability

Even if you have a high FICO score that qualifies you for a good deal on an auto loan, you need to know how much you can afford to spend for a car. Figure out how much buying a new car will actually cost you. Besides the total of your monthly car payments, include the value of your trade-in and the amount of your down payment. While taking an auto loan out for a longer term might seem like a good way to lower the monthly payments, it will cost you a whole lot more of your money over time. Take heed of what the dealer doesn’t tell you when you take a vehicle out for a trial spin. At some point before the loan is paid off, you will owe more on the car than it’s worth.

About the Author

Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.